But wind that cycle back a stage and you can immediately generate a severe disgust reaction. So much so that even in areas with a severe shortage of water any attempt to use our advanced technological knowhow to short-circuit the evaporation/precipitation part of the cycle gets a label: “toilet to tap“.

And that tends to stop any rational debate on the subject stone dead.

Precisely the same trick is used with government spending. Government spending is just like the pre-treatment of water. It is an artificial intervention into the natural system that stops people and businesses dying unnecessarily. It is why we have an advanced economy rather than all of us having to stew our own cowpat juice.

And, like water, any spending in a credit economy creates a form of effluent that has to be dealt with by an active intervention. These are the excess saving desires of the non-government sector. They have to be sorted out or everything starts to go very smelly very quickly.

And it is all a cycle. Government spending generates a taxation flow or an amount of excess saving ‘solids’ that has to be processed by the government sector to stop it causing paradox of thrift problems.

Opponents of this advanced technology then invoke the ‘toilet to tap’ line to create a disgust reaction – simply by winding the spending cycle back a step.

They imply that government spending depends upon borrowing and they call the excess savings the Public Sector Borrowing Requirement.

Since in our society borrowing is considered dirty, if not outright sinful, it tends to stop any rational debate on the subject.

Our advanced water treatment mechanisms allow us to augment the natural process. Without it our population would be decimated by our own effluent and our standard of living would be dire. Many in the world are still without it. Unnecessarily.

Similarly advanced fiat money technology augments the natural spending cycle. Without it our economies would be in depression and our standard of living much, much lower.

Never let the philistines win the argument with their emotional trickery – on water or money.

71 comments

We are not idiots. We get your theory already. What I am not sure of is why you think that such a simple idea would be difficult to understand, or that that is what’s causing our angst.

Let’s talk about reality for a second. In reality when the government prints money (let’s not kid ourselves here) the printed money goes first into the pockets of the “people” own the government, i.e those like Lloyd Blankfein, who use it to drive up the prices in things like oil and corn. Meanwhile Joe Blow who makes 10 bucks an hour and hasn’t gotten a raise in 6 years just had the price of his favorite beer and gasoline for his Chevy pick-up shoot through the roof.

So yes, the government can and will print and spend all the money it wants to. And while that is going on, the lives of the poor will continue to get even more miserable than they already are–because printing money does not do one damned thing for poor people, but it does so much good for the elites. And that’s why it’ll keep going on. So there is no danger of austerity hitting America, at least not until the USD loses its reserve status and Americans lose access to imports.

Boy, do you read the news? What do you think the payroll tax increase, serious and likely to succeed efforts to cut Medicare and Social Security, and other deficit cutting machinations are about? They ARE austerity and the reason they are likely to succeed is the public has been trained to believe borrowing is ever and always bad.

Your denial that this message has been sold hard, is widely believed, and is the driver of continuing, counterproductive austerity campaigns in the Eurozone and one just getting underway in the US is astonishing.

It’s a kind of Othello’s Syndrome, methinks. An older denialist is insanely jealous of the young, hot, Desdemona Fiat. They come to believe that she is a venal and promiscuous adulteress, even though there is contrary evidence in abundance. For instance, Desdemona Fiat has just doubled up on the Chastity Belts.

And yet and so, our mad aging denialist plots to kill her.

Which is weird, because as far as I know, despite having many attractive qualities, Desdemona Fiat is not only unmarried, she’s can’t hardly land a date –be it dream or cheap or discharge from the bowels of hell itself.

Note: The exception to this type of Othello’s Syndrome is China, of course. China has been known to publicly wine and dine Desdemona 24/7. Some even say that China and Desdemona Fiat are centrally planning secret nuptials.

I don’t understand the main post and doubt it adds anything to any rational debate, but the question is whether elected government should be free to spend without borrowing, or only banks should be privileged to endow selected private actors to freely spend, on the theory that banks are somehow more ‘responsible’ than politicians.

Regardless of which faction holds the levers of money creation, private savers are relentlessly screwed by ungovernable competition from the beneficiaries of government (and/or banking) largesse. But for a large majority of the population, which owns not much more than clothes and tools, the only serious issue is the availability of work at a living wage. When bank lending to private actors is inadequate to create necessary employment, only fools and charlatans would deny government the power to fill the void.

I disagree with the premise of the article, because the paradox of thrift is a fallacy, and there is no such thing as “excess” savings.

Savings, like anything else in a market economy, is a function of supply and demand based on prices (interest rates) and aggregate consumer preferences.

Moreover, savings channeled into investment is the only actual way to grow an economy, because it’s the only way to generate capital that increases actual productivity. In contrast, increasing consumption or government spending simply shifts resources away from other subsectors of GDP (while increasing exports is offset by a decrease in GDP elsewhere), resulting in no increase in wealth.

Conclusion: government action to stimulate the economy does not work. Government’s role is to regulate, enforce property rights, and to cure sources of market failure (such as by eliminating the tragedy of the commons and “externalities”)/

It’s curious that Yves Smith and her cohorts fail to deny that money printing devalues the spending power of economic actors with small or zero capital such small businesses and workers who don’t face twenty percent raises every year.

The only thing that government borrowing is doing is allowing is allowing people to have things they are not willing to pay for or cannot pay for by paying more in taxes. It’s the magical free lunch that allows people to think that everything is ok while capital flight continues.

I really think liberals are on the wrong side of this rationally and morally, when they say that a government has the option of technically defaulting on its debt by devaluing its currency while suggesting that this money printing will not hurt its citizens.

The bottom line is that there is more at stake than those on the Left are willing to admit to. One possibility is that on some unconscious level, I think, most white collar knowledge workers who are for sustained government borrowing understand that government borrowing is the only thing keeping them from being destitute. Why else would they be calling their opponents “urine drinkers” and “dung eaters”?

Agreed. Yes, the post makes a really bad analogy. When the water cycle is not working would be a better analogy but then why not just describe when the financial cycle is not working and forget about the water cycle?

Perhaps a joke (courtesy of Wendell Berry) might help explain what is going on here:

Economics 101

The Economist takes a field trip to visit The Farmer. He sees the fields and takes a few notes. The Farmer stands by with pride as the Economist scribbles feverishly upon his pad.

The Economist closes his notebook and wipes his glasses as The Farmer looks out declaring, “Beautiful isn’t it? These fields mean food through the winter for the entire valley.”

The Economist sighs knowingly and says, “Possibly but scarce resources mean we must better manage resources to optimize production.”

At first The farmer seemed confused and a little dejected that The Economist would not, could not, behold what lay before his eyes but then a gnawing doubt came over The Farmer, “the man of letters must know something”, and he asked The Economist to explain how things could be better.

The Economist did just that.

The Farmer excited by the prospects of such amazing abundance practiced exactly what The Economist had preached. This went on for several years, despite decreasing results, as The Farmer thought that The Economist must have the wisdom that would bear fruit but only after years of implementation.

Finally one winter, by now The Economist hadn’t been seen for years, The Farmer decided that he would go back to The Old Ways as the people in the valley had suffered since the advent of The Economists’ wisdom.

The Farmer found that once again the abundance he produced was quite enough to feed the people of the valley and that this was enough.

After a few years of this The Farmer received an unexpected visit from The Economist. Upon arrival The Economist immediately took out his notebook and began scribbling. The Farmer looked over and said, “I took your advice and the people of the valley barely made it through the winter whereas before we lived in abundance. Now I’ve gone back to The Old Ways and once again the people are fed.”

The Economist spoke, “Yes, I can see that. That explanation may be all well and good in reality, but it will never work in theory.”

Yea, that’s pretty clear. Correct me if I’m wrong but I’m pretty sure the joke makes fun of economic orthodoxy, such as austerity, which means that you are both saying the same thing? Again, correct me if I’m the one who doesn’t get the joke.

That sure was a long-winded way of telling the joke. But Wendell Berry has always seemed excessively wordy . . . every time I try to read him.

Many years ago I read a debate between Wendell Berry and Earl Butz about agricultural policy and etc. I agreed (and still do) with Berry’s outlooks and opinions, but I liked (and still do like) Butz’s personal style way much more. Butz could cram a paragraph into a sentence. Berry expands a sentence over a whole page. He just goes on and on and on and on . . . .
I got the feeling that the young Butz had known pre-adult personal hardship which Berry could hardly imagine.
That’s totally off the main point I know.

You don’t know who Wendell Berry is. That’s obvious. And your powers of analysis can’t comprehend theory and practice and you probably don’t get the connection of that with dogma and ritual. But the practical results of the farmer, providing food on the table must be some crazed mystical experience that you are too clever for. Really, it’s not, how does the NYC intelligentsia put it, 11th dimensional chess. Food on the table, a roof over your head, clothes on your back. Economic problems solved. Political problems begin. But, I would have to elaborate that one, as the economist represents the brain police from central planning making sure that you feed yourself with the appropriate bourgeoisie science of Taylorism. I guess you don’t know who Taylor is either. Well, if you’re young, you have plenty of time to use the Wiki thing a ma jig and read up. You can learn a lot hear by following up on your own, the names that are mentioned. Like Wendell Berry. If you’re kind of old, let’s say over 45, well I don’t know, maybe you try yoga and loosen up a bit?

Since it hasn’t yet occurred to anyone that *neither*
austerity, nor stimulus, can make the enormous amount
of working stiff’s (home, student, medical) debt payable
on their declining income, it’s probably best to have
fun and give the erosion of time a chance to expose our
current leadership for what they are….a deck chair
rearrangement committee.

Participation in a globalized economy with few trade barriers requires that living standards (wages, purchasing power, whatever you want to call it) everywhere come down to what is the norm in India. Stimulus tries to bring back the economy of yesterday, and Austerity threatens to shoves us towards a resource-scarce near-future banana republic that is daily life to the average Indian. The average Indian has sporadic access to amenities like electricity because infrastructure investment would force India to raise taxes on job creators and other people with capital.

In fact, in Wiki, you can find an entry call urine therapy or urotherapy.

The analogy of drinking urine directly might be to get at the GDP directly, through GDP sharing, without having to rely on manna trickled down from the government either through its selected companies for projects favored or through banks who can access money directly.

Nice try on the analogy, except for one fairly blatant omission which can both validate and invalidate your thesis: the multiplier.

In your example, water operates in a closed system. That’s fine, excluding a trivial amount it does. Thus for water, for every drop you drink, you’ll eventually put it back into the system.

One of the things that you learn in intro macro is that this isn’t the case for money. $1 put into the system will go through the system and end up greater, or less than (or technically equal to) $1 – the multiplier, and hence the system is dynamic (ie economic growth). The size and direction of the multiplier roughly depends on where the economy is relative to its capacity – ref. potential GDP (of course when you learn it in intro macro you learn it depends on the marginal propensity to consume, which is exogenous, but to save time we don’t need to connect the dots here, I think). When you isolate government spending you need to look at other factors as well, eg crowding out.

As we are not so lucky right now, most economies – especially the US – are operating far below their potential. Thus, fiscal/monetary stimulus will probably have a multiplier that is greater than 1, and it will have a positive effect. If we were talking about stimulus a decade ago (*cough*Bush-tax-cuts-and-increase-in-military-spending*cough*cough*), then maybe the stimulus might not be as effective, and the multiplier may be less than 1 (*cough*especially when you combine it with interest rates kept ridiculously low despite an overheating economy), which could result in worse things.

But, my point is to look at the economy, or fiscal policy, as a closed system, is not correct. Please don’t make me eat any more poop.

“And, like water, any spending in a credit economy creates a form of effluent that has to be dealt with by an active intervention. These are the excess saving desires of the non-government sector.”

The “excess savings desires” of the government can be thought of as the marginal propensity to save — i.e. the obverse of the multiplier in a closed economy. The implication here is that even if the multiplier is low the government should still spend.

“The size and direction of the multiplier roughly depends on where the economy is relative to its capacity.”

This is wrong.

“When you isolate government spending you need to look at other factors as well, eg crowding out.”

If you believe in crowding out then you’re about ten miles behind Wilson.

And incidentally, the multiplier is insanely hard to compute. The result is that we are better off simply saying “Give the money to people who have a shortage of money, and spend it on building useful things”. This gives us the things with the “highest multiplier”, quite consistently.

The alternative policy is “give the money to people who have more money than they know what to do with, and spend it on blowing things up”. This gives us “low multiplier” results, consistently.

Phil – you’re telling me that you think that the difference between actual and potential GDP don’t have an effect on the size of the multiplier? Hmmm it would seem like these guys over at NBER would disagree: http://www.nber.org/papers/w17447

And your going to disregard crowding out? Clearly you’ve only studied recessionary economics. There is such a thing as full employment, and (if we ever get back there) there does exist a concept called crowding out. Disregarding that is just bush league.

“One of the things that you learn in intro macro is that this isn’t the case for money. $1 put into the system will go through the system and end up greater, or less than (or technically equal to) $1.”

No. This is the kind of thinking that permeates economic understanding but it’s just plain wrong.

The multiplier is a reference to spending, a flow. The level of dollars in the system is a stock and spending is inversely related to saving…the more funds saved the fewer funds available to spend.

Spending never accumulates to a stock…it’s a measurement and nothing more.

Spending a dollar over and over again does not create more dollars.

Drinking the same glass of water (or urine) over and over again does not create more water.

While you’re right that confusion between stocks and flows is a big issue,

….when it comes to money, ONLY FLOWS MATTER. Stocks are pretty nearly irrelevant, except for the destabilizing potential involved in high stocks (which can turn into high flows very suddently) and the implication that low stocks are likely to mean low flows.

So when talking about money there is really no point in discussing stocks rather than flows.

– Well the number one Big Con here is calling what the Government does ‘debt’. If the Treasury and Federal Reserve were collapsed into one entity, it would be obvious that the Government simply increases liquidity, not debt (hat tip Dan Kervick’s recent article).

– Second point: if you cut private saving, as essential adjunct to gaining wealth, there are only two tried and true methods of getting Rich remaining. These are: Inheritance, and Fraud.

Sure gov’t borrowing makes sense for all the good reasons you’ve mentioned, but only in ordinary times and under ordinary conditions. These are not ordinary times and the conditions are dire, and becoming ever moreso. It’s one thing to borrow in order to make good and/or necessary things happen. It’s another to borrow mostly in order to pay back old debts and keep the head above water (just barely). This is where we now find ourselves — i.e., the responsible era of deficit spending is over and things are now getting out of hand.

I am NOT a Tea Partier, NOT a Republican and I am definitely NOT a supporter of austerity — I believe very strongly in programs in support of poor and working people, including a WPA style jobs program. What bothers me is the false dichotomy accepted by so many, including just about everyone posting here: continued borrowing and/or printing of fiat money vs. austerity.

C’mon folks. The money is there! This is an enormously wealthy country. There is no need to borrow or print money. What’s needed is leadership that will stand up to the oligarchs and force them, and others will absurdly high sources of essentially unearned income, under penalty of imprisonment, to pay their fair share of taxes. This is what we should be fighting for, NOT the continuation of a status quo that’s already failed and will fail again and again until it all collapses under our feet.

“Sure gov’t borrowing makes sense for all the good reasons you’ve mentioned…”

Bad framing…the government doesn’t borrow. It is impossible to borrow something that doesn’t exist…and money doesn’t exist unless the government issues (prints) it. Credit is even more non-intuitive but credit creates zero net money.

The most we can say about the government’s obligation is that it pays interest on dollars that were previously created…a voluntary action by the way (in that Congress created the necessity).

I had high hopes for the article based on the byline but was grossly disappointed. No mention that:
1) The Sawbuck in your pocket is a creation of government debt.
2) Government Debt equals Private Saving
3) The ‘leak in the dam’ is elites taking money out of the system by storing trillions in gold off shore and avoiding taxes (putting back into the system by retiring debt.)
A credible definition of the economy is that it is the creation of, servicing of and retirement of DEBT. No government debt, we’re back to barter.

Yves, can somebody write, or can you republish an article explaining money flow from an MMT perspective(?)..many thanks…cheers…

“From the union of power and money,
from the union of power and secrecy,
from the union of government and science,
from the union of government and art,
from the union of science and money,
from the union of ambition and ignorance,
from the union of genius and war,
from the union of outer space and inner vacuity,
the Mad Farmer walks quietly away.”
― Wendell Berry

“A credible definition of the economy is that it is the creation of, servicing of and retirement of DEBT.”

Government debt is not retired, nor will it ever be if we value our economic system and our individual well-being.

Neil’s analogy is an apt description of the underlying dynamic of the money system. The fact that a lot of folks don’t recognize the patterns, which reoccur throughout systems we rely on everyday is problematic.

I like this metaphor, it’s highly descriptive of the way our society functions, or doesn’t. The water cycle, including our efforts at sewage treatment – so as not to poison ourselves, really is comparable to a money cycle in an industrialized society. The missing part is the part of the analogy is where water actually gets down to the thirsty roots and microscopic critters in the estuaries. In nature this would be the high tech sewage plant. But our economy is incomplete and inefficient. In the money cycle-society people at the bottom of the money chain still need considerably more money to be healthy participants in the economy. But way too much of it goes to the bankster industry where it is recycled away from common people. So I see it not as a question of debt and that debt is stigmatized so much as I see it as a question of unlawful appropriation and distribution. Let’s get rid of this form of banking (almost synonymous with daming) and create an institution analogous to irrigation canals.

Neil, I love this post, and I can’t believe most of commenters missed the point. It is that when you look at the contrasting flows of water and money you can provoke a reaction of emotional disgust short-circuiting rational debate about both types of flows. With water however, we recognize that need to consume it, wherever its been in the past and however unsavory the process that brought it to us; while with flows from the Government we get hung up on the unsavory aspects of government finance, and so don’t think rationally about what will happen, if we reject the unsavory aspects (borrowing) by practicing austerity. I think the analogy is very apt and that the shock value of the first part of the diary will help a lot of people in seeing the issue clearly.

Yet another statement of the false dichotomy. A formula for returning us to the status quo. There is NO NEED TO BORROW ANY MORE than what we’ve already borrowed, which is far too much. This country is awash in wealth. We need to find a way to tap it. The oligarchs be damned!!!!

My grandfateher, who was a successful businessman, had this motto: “What you owe, you owe.
What you own, you may not own.”
Can someone explain to me why his philosophy no longer seems to “hold water?”
Today, we seem to think that debt equals wealth.
And, as Bruce Webb infamously declared, “The Treasuries in the Social Security trust fund are better than cash, for they pay interest.”
Don Levit

Highly trained, highly credentialed economists disagree on even the most basic macro questions: austerity or stimulus? Tax cuts or tax increases? Government multiplier real or chimerical? If physicists disagreed about such basic questions they’d be cashiered. Economists must be stripped of their pretense of scientific certainty. They are much more like priests each peddling his or her own faith. What if neither austerity nor deficit spending offers a way forward? Suppose that the era of exponential growth is just plain, flat over?

There are only a few technologies that have ever been used since the stone age to desalinate water. This is not exactly an active field. The very word “technology” has been usurped by the dot com and telecom industry. Water technology, which underlies our basic technical infrastructure, and existence itself, and is intimately related to both energy and food. Yet, it gets short shrift. On an absolute level, investment is nil, although there has been a wave of recent startups in this field, but , valuations are either way under, or way over the mark. This is evidence that the investment community has no clue what they are doing.

If’s going to be difficult to argue against the imperative to cut into the double-digit percentage increase in various key categories of government spending over the past five years unless one honestly assesses the reason why the present revenue-to-GDP ratio is at a 60 year low.

Dialog concerning “government spending” ought be broadened to incite consideration of all tax revenue generating activity operating in the economy, including that directly promoted via the fiscal budget, as well as that generated via policy (or not generated due to abject policy failure)–tax and investment policy in particular.

As the issue of “government spending” today concerns itself with a parabolically increasing national debt, I should say it is not difficult to conceptualize Hamilton’s notion of a national debt being a national blessing, so long as one can make a sound case that, economic capacity available to satisfactorily extinguish that debt in fact is, or will be, in place (this serving government’s tax revenue generating capability, the likes of which the national debt more or less exclusively should further venture to facilitate). The question at the moment, then, is whether in fact our parabolically increasing national debt can be satisfactorily extinguished without ever a risk its repayment would impinge on economic activity?

More to the point, could even a change in tax policy serving to increase revenues assure the national debt will be satisfactorily extinguished, this while, at the same time, the national debt’s nominal growth continues apace with overall economic growth?

Would even a 1% Wall Street transaction sales tax (with politically necessary, mom and pop exemptions, as these already pay an inordinate share of sales taxes across the broader spectrum where such taxes are collected) succeed in turning back today’s austerity ghouls, assure the national debt’s repayment, as well as not in the least impinge on economic activity?

No absolutely not. We are up to our necks in economic theory and live with a paucity of actual economic fundamentals. Perversely, the farther we detach from simple market fundamentals and lose sight, the easier it is to float the more surreal notions and have them find some favor.

If there is going to be some inclusive discussion on the subject of currency then it should be recognized for what it initially began as, and what it should always be held to, a medium of commerce.
It is, and this point should never be lost, at it’s base, a social contract. This social contract has been in a decline since it’s inception, and the notions put forth from the MMT consortium are on par with this decline.
Every step in the devaluation of the currency, and by extension the social contract, began as some economic theory. By and large they seem to favor those who deal in finance further degrading the contract.
We’re now to the point where the MMT consortium has flipped the market fundamentals on their axis to explain issuing currency and taxation as a vertical transaction, when their is no market fundamental to explain this until you introduce “systemically important”, creditor, or other financial courtesans into the hierarchical structure.

The post needs some diagrams! I know the water cycle, but I’m not familar with the money cycle diagram. Don’t get me wrong, I’ve studied quite too much economic theories to be a babe in the woods. And capitalism is definitely money in flow, money spent over time. So, in order to keep me from sitting down and doing the work, how about a diagram from Mr Wilson? (Yves, hope this I-don’t-want-to-do-my-homework dodge is acceptable, haha).

What would happen if the Fed cancelled some portion of the U.S. Treasury Bonds that it holds? What is accomplished when U.S. individuals and businesses are taxed to pay interest to the Fed? Has any central bank ever tried a policy of debt cancellation? With what results?